Thank You

Error.

The Lazarus rally continued last week, and stocks raced ahead, this time by more than 2%. Following this month's trend, the worst stocks of 2011 have been raised from the dead and are the leaders of the still young 2012.

The 50 worst-performing stocks in the Standard & Poor's 500 Index last year, for example, have jumped about 11% this year, while 2011's 50 best stocks are up just 2%, according to Bespoke Investment Group.

Trading volumes last week were generally light, and earnings results were taken positively by the market, even though there is evidence of slowing revenue gains at some big companies. No one's going to sniff at last week's rise, but a pullback in the next week or two would seem to be in order. (More on that below).

While its revenue numbers were light, the biggest Lazarus of them all,
Bank of AmericaBAC -0.41881443298969073%Bank of America Corp.U.S.: NYSEUSD15.455
-0.065-0.41881443298969073%
/Date(1427828779555-0500)/
Volume (Delayed 15m)
:
31751374
P/E Ratio
42.958333333333336Market Cap
163276618878.357
Dividend Yield
1.2932428063368897% Rev. per Employee
436397More quote details and news »BACinYour ValueYour ChangeShort position
(BAC), did report better-than-expected fourth-quarter revenue Thursday. The rest of its results were made murky by charges and one-time gains, and its basic banking results weren't stellar. Still, that didn't stop investors from bidding up the market and the stock, the latter now up 27% this year and the leading Dow component.

"Stocks left for dead have come back to life, and people are feeling good about a rally led by financials," notes Nicolas Colas, chief market strategist for ConvergEx Group. "It follows the old-school playbooks, and as long as banks lead, it's going to be hard to suppress the rally."

International Business MachinesIBM -0.534825106042909%International Business Machines Corp.U.S.: NYSEUSD161.8
-0.87-0.534825106042909%
/Date(1427828779542-0500)/
Volume (Delayed 15m)
:
1876009
P/E Ratio
13.49Market Cap
160786932097.002
Dividend Yield
2.718062762540153% Rev. per Employee
244455More quote details and news »IBMinYour ValueYour ChangeShort position
(IBM), Microsoft and Intel all reported slower revenue growth. "Revenue trends were disappointing, and that could have given investors an excuse to sell off, but they didn't," observes James McDonald, chief investment strategist at Northern Trust. It's a good sign that the market finished up strong in spite of that, but the sales weakness speaks to European and global growth issues, he adds. That could become a sore point if it continues through the earnings reporting season.

Before we leave you feeling all warm and fuzzy about the market, consider a few issues that might lead to a near-term pullback after such a fast, furious and unexpected rally.

For one, a trader points out, the short interest—or level of investors who are betting on stocks to drop—is at the lowest level in at least a year. That suggests buying from short covering is exhausted for the time being.

Additionally, the Chicago Board Options Exchange Volatility Index, or VIX, is down to levels that suggest rising complacency on the part of investors. It won't take much of a bearish surprise to create a near-term drop.

In terms of earnings, as noted, while the profits reports last week were good, the weakness in revenue growth bears close watching. It seems as if investors are cognizant of slowing sales growth, but it doesn't mean they will always ignore it.

DEFENSE STOCKS HAVE RECOVERED some from the 2011 lows reached last August, but they've underperformed the market. Investors expect that the combination of a return of U.S. forces from Iraq and federal government belt-tightening will significantly reduce future military spending.

That's a legitimate concern, but some stocks appear to have fallen to levels where a lot of bad news has been discounted in the stock price. Shares of mid-cap
Alliant Techsystems
(ATK), for example, are down 15% from their summer level, versus 5% for the industry. At Friday's close of 61.78, the shares are down about 50% from all-time highs set in late 2007 and sport a much lower price/earnings ratio, even though the company is likely to earn 25% more in the next year or two than it did back then. The backlog is a healthy $6.5 billion, though not all of that is locked in.

While the market is worried about a decline in defense earnings, Alliant should still see profits stabilize at about $8 a share in earnings for the next several years, thanks to nice backlog of signed contracts, says Craig Giventer, a money manager at Financial Partners Capital Management, which owns Alliant shares.

The company's small-, medium- and large-caliber ammunition operations account for 37% of sales: Missile products for defense and NASA make up 14%; aerospace systems components, 30%; and security and sport products, 19%. About two-thirds of sales come from the government, but foreign sales, now just 14% of the total, are growing.

Arlington, Va.-based Alliant is generally diversified and doesn't depend on one defense program that might get the ax, Giventer says. Indeed, it is more typically a low-cost provider of munitions for a broad range of weapons, and the company also makes sales of ammunition to law-enforcement personnel and private gun owners.

As this column noted a few weeks back, in recent months, the shares of gun makers have taken off on higher pistol sales around the country. Alliant makes the ammo for those guns.

That hasn't helped the stock. It trades at about seven times consensus analyst expectations of $8.81 in the fiscal year ending this March, and $8.48 in fiscal 2013. Earnings could go down a bit, but using just about any important metric typically employed by investors, Alliant now trades at or near historical lows.

Falling results don't seem to be an Alliant habit. It has a track record of a decade of consecutive annual sales increases, and nearly that many years of higher profits, too. In March-ended fiscal 2011, revenue rose 5%, to $4.8 billion, and earnings rose to $313 million or $9.41 a share, from $279 million or $8.48.

Alliant has a healthy balance sheet, with cash equal to 13% of its market cap.

Market sentiment can change rather precipitously on defense shares. In the 1990s, after the Berlin Wall fell, defense stocks took a hit as the world's investors expected peace to break out all over. Sadly, that didn't happen, and it isn't about to happen now that U.S. troops have happily come home from Iraq. There's Afghanistan and plenty of other potential hot spots.

Pardon our pessimistic view of humanity, but history shows that underestimating the species' capacity for mayhem is not a good bet. But at this price, Alliant stock should be for the long-term investor. It trades like a broken stock, but it's not.

Last week's rally helped many stocks, including small-cap
Pep Boys—Manny, Moe & JackPBY 0.4175365344467641%Pep Boys-Manny Moe & JackU.S.: NYSEUSD9.62
0.040.4175365344467641%
/Date(1427828779340-0500)/
Volume (Delayed 15m)
:
72851
P/E Ratio
N/AMarket Cap
512606630.362854
Dividend Yield
N/ARev. per Employee
106883More quote details and news »PBYinYour ValueYour ChangeShort position
(PBY). The shares rose about 6%, to 11.38, though they're 30% below their 52-week high. The auto-parts retailer and service company has been turning around slowly but steadily right into the teeth of the financial crisis. It's worth a look if indeed the U.S. economy will continue to expand and unemployment continues to drop.

With the average U.S. car more than 10 years old, "it's a good business to be in, and the risk/reward looks appealing," says Nicholas Galluccio, the CEO of Teton Advisors, which owns Pep Boys shares.

New managers arrived at Pep Boys beginning in 2007, and their efforts are bearing fruit at the once-struggling company. But it's not a widely followed stock, he notes, and there are some not-so-obvious basic company attractions that help give some cushion to what is a play on a growing U.S. economy.

For example, Galluccio points out, Pep Boys owns about 232 of its 735 locations around the country. The value of that real estate and its Philadelphia headquarters was recently estimated at $690 million. That doesn't include the company's four distribution centers and its small office building in Los Angeles. On the balance sheet, there is about $80 million in cash.

When the $295 million in company debt is subtracted from the property and cash total of $770 million, the result, $475 million, is equal to some three-quarters of Pep Boys $622 total market cap. Effectively, investors are paying significantly less than it seems for the still-improving underlying business. The numbers suggest that the stock is undervalued, Galluccio says.

Pep Boys trades at 16 times analysts' consensus earnings-per-share estimate of 71 cents in the fiscal 2012 year, ending this month, and 12 times the 92 cents projected for fiscal 2013, or calendar 2012. While those P/Es aren't inordinately cheap on an absolute level, Pep Boys does trade at a big discount to just about any of its own historical valuation metrics. It also sells at a discount to the 19 P/E of the industry, which includes auto-parts retailers like
AutoZoneAZO -0.11314514491282021%AutoZone Inc.U.S.: NYSEUSD688.6
-0.78-0.11314514491282021%
/Date(1427828737238-0500)/
Volume (Delayed 15m)
:
191199
P/E Ratio
20.16076653013458Market Cap
21869201600.3625
Dividend Yield
N/ARev. per Employee
128884More quote details and news »AZOinYour ValueYour ChangeShort position
(AZO) and vehicle-repair shops like
Midas
(MDS).

And things have gotten, well, peppier. In fiscal 2011, Pep Boys earned 70 cents a share, up from 44 cents in fiscal 2010 and a loss of 58 cents in fiscal 2009, or calendar 2008.

That was about when the current managers took over. Now, the company is embarking on a remodeling of new stores and retrofitting of old ones expected to reduce costs significantly. Management guidance is for operating margins to go from just under 4% to the "mid to high" single digits and for pretax return on invested capital to rise to the "high teens" from the current 10%, by 2014. Additionally, Pep Boys shares have performed worse over the past 12 months and remain further off their highs than peers' shares.

On the bear side, Pep Boys' return on equity is about half that of its rivals. North American car sales are starting to perk up, so the average fleet age might be peaking, and newer cars generally need less maintenance.

Nevertheless, there are plenty of cars that do. If the turnaround continues, a return of the "risk on" trade could propel Pep Boys another 10% or more this year.

Big Week

The Dow rose each day last week, closing 2.4% ahead. No stock fell, and Bank of America led again, up 7%.